Prices for fruits and vegetables will be displayed in stores in Brooklyn, New York on March 29, 2022.
Andrew Kelly | Reuters
Global markets have rallied in recent weeks with data suggesting inflation may have peaked, but economists have warned of a resurgence of the “temporary” inflation narrative.
When the October U.S. consumer price index fell short of expectations earlier this month, stocks rallied as investors began betting on the Fed’s aggressive rate hikes to ease.
While most economists expect headline inflation to fall significantly overall in 2023, many do not believe this is a harbinger of an underlying disinflationary trend.
Paul Hollingsworth, chief economist for Europe at BNP Paribas, told investors on Monday the return of “Team Transitory,” a reference to the school of thought that higher inflation expectations at the start of the year would be temporary. I warned you to be careful.
The Federal Reserve itself is a proponent of this view, and Chairman Jerome Powell finally ruled that the central bank had misread the situation.
“While a resurgence of the ‘temporary’ inflation narrative may appear appealing, underlying inflation is likely to continue rising relative to historical levels,” Hollingsworth wrote in a research note. He added that upside risks still existed to headline rates next year, including a possible recovery. in China.
“The large swings in inflation highlight one of the key features of the global regime shift that seems to be underway: high inflation volatility.”
The Bank of France expects a “historically significant” drop in headline inflation next year, with almost all regions seeing lower inflation than in 2022. This reflects a combination of base effects. Shrinkage — The dynamic between changes in supply and demand.
Hollingsworth speculates that this could revive the ‘temporary’ narrative next year, or at least the inflationary trend that emerges next year as a sign that investors are ‘inflation rapidly returning to its ‘old’ normal. The risk of doing so” was pointed out.
These narratives, he suggested, could be translated into official projections by governments and central banks, and the UK’s Office for Budget Responsibility (OBR) said, “In stark contrast to the current market RPI fixation. The Bank of England projected full deflation in 2025-26, with medium-term inflation projections well below target.
Skepticism about a return to normal inflation levels was echoed by Deutsche Bank. Chief investment officer Christian Nolting told CNBC last week that the market is prematurely pricing a central bank rate cut in the second half of 2023.
“Looking at our model, we certainly think there’s a gradual recession, but from an inflation perspective, we think there’s a second-order effect,” Nolting said.
He pointed to the 1970s as a time when the Western world was rocked by the energy crisis, and suggested that the effects of a second round of inflation had occurred and that central banks had made “premature cuts.”
“From our perspective, we think next year’s inflation will be lower, but higher than last year, so we’re going to keep it at a higher level, and from that perspective, the central bank will stick with the status quo and not cut rates significantly. “Fast,” added Nolting.
reason to be cautious
It was widely believed that some of the massive price increases during the Covid-19 pandemic were not really ‘inflation’ but the result of relative changes reflecting certain imbalances between supply and demand. BNP Paribas believes the same is true vice versa.
As such, disinflation or outright deflation in some areas of the economy should not be seen as an indicator of a return to the old inflationary regime, Hollingsworth argued.
Moreover, given the impact of the surge in costs over the past 18 months on margins, it suggested that companies may take longer to adjust to price cuts than to price increases.
While goods inflation is likely to slow, BNP Paribas sees service inflation more robust, partly due to potential wage pressures.
“Labor markets have historically been tight, and to the extent that there has likely been a structural component to this, particularly in the UK and the US (such as increased inactivity due to prolonged illness in the UK), wage growth has been sluggish in the past. It remains relatively high by the standards of ,” Hollingsworth said.
China’s Covid policies have regained headlines in recent days, with Hong Kong and mainland stocks rebounding Tuesday after Chinese health officials reported a recent rise in vaccination rates among the elderly.
BNP Paribas forecasts that China’s gradual easing of its zero-coronavirus policy could trigger inflation for the rest of the world.
“By contrast, a stronger recovery in Chinese demand would likely put upward pressure on global demand (especially commodities), and therefore, all else equal, inflationary is likely to increase,” he said.
A further contribution will be the acceleration and emphasis of the decarbonization and deglobalization trends brought about by the war in Ukraine, he added.
The BNP argues that changes in the inflation regime are not only about where price growth settles, but also inflation volatility highlighted by big swings over the next 1-2 years.
“Certainly, we believe inflation volatility is still likely to decline from its current very high levels,” Hollingsworth said. No,” he said.
